What is GST and How it will affect the Common Man

How India’s Tax System Structured Today

The constitution divides taxation powers between Centre and States. Both level of Government

What is the Problems with this arrangement

There are two important problems with the current arrangement:-

First some goods which are manufactured are levied Indirect Tax called Central Excise at the factory gate. Subsequently when they reach a retail outlet and is bought by a consumer, State Government levies a tax on the consumption dubbed as Value Added Tax (VAT).

So we have a Tax at Factory Gate which adds to the cost of the goods and another tax i.e VAT on Final Price.

Since States have exclusive domain on consumption tax i.e VAT within their borders, they treat Goods coming from other states as ‘Imports”. If the goods are sent across the state borders and sold in another state an ‘Export” tax called Central Sales Tax is collected by the selling state.

As seen above there are multiple taxes when there is commerce across state borders. Consequently it increases cost for everyone and makes economic activity within India and for Indians complicated.

How GST Help

The GST shall have two components: one levied by the Centre (Central GST), and the other levied by the States (State GST). Rates for Central GST and State GST would be prescribed appropriately, reflecting revenue considerations and acceptability. This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State).

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer.

At the Central level, the following taxes are being subsumed:

·         Central Excise Duty,

·         Additional Excise Duty,

·         Service Tax,

·         Additional Customs Duty known as Countervailing Duty, and

·         Special Additional Duty of Customs.

At the State level, the following taxes are being subsumed:

·         Subsuming of State Value Added Tax/Sales Tax,

·          Entertainment Tax (other than the tax levied by the local bodies), CST

·         Octroi and Entry tax,

·         Purchase Tax,

·         Luxury tax, and

·         Taxes on lottery, betting and gambling.

The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services, goods which are outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of Central Excise.

Credit of Input Tax :

Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.

The final consumer will thus bear only the GST charged by the last dealer in the Supply chain with setoff benefits at all the previous stages.

 Interstate Transactions:

 In case of interstate transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all interstate supplies of goods and services under Article 269A (1) of the Constitution. The IGST would roughly be equal to CGST plus SGST. The IGST mechanism has been designed to ensure seamless flow of input tax credit from one State to another. The interstate seller would pay IGST on the sale of his goods to the Central Government after adjusting credit of IGST, CGST and SGST on his purchases (in that order). The exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will claim credit of IGST while discharging his output tax liability (both CGST and SGST) in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST. Since GST is a destination based tax, all SGST on the final product will ordinarily accrue to the consuming State.